Canadian Economist Takes Swipe at Mark Carney’s Policies

Economists at a major Canadian bank took aim at the post-recession actions of Canada’s former top central banker, Mark Carney, arguing his policies led to an over-valued Canadian dollar and plant closures, and left an economy “struggling to wean itself off homebuilding.”

Mr. Carney led Canada’s central bank until he decamped to become governor of the Bank of England last July. He has been widely credited for helping to steer Canada out of the Great Recession faster than other developed economies. That was due largely to his signature forward guidance, in which he pledged to hold rates at ultra-low levels for a specified period of time to help the economy regain some traction.

Unlike the U.S. and U.K. central banks, the Bank of Canada didn’t have to go the quantitative easing route, even though that was an option in its toolbox. In fact, the Canadian central bank was the first in the G-7 to hike rates after the recession, with three increases in 2010.

Mr. Carney has acquired something akin to rock-star status in central-banking circles for his able stickhandling of monetary policy.

But it turns out he isn’t immune to criticism. According to a report from Canadian Imperial Bank of Commerce’s investment banking arm, Mr. Carney decisions left the Canadian dollar “seriously” over-valued and resulted in factory closings. Canada is in “reasonable overall shape” but “still struggling to wean itself off homebuilding as a source of growth, the report said, adding that “in effect, monetary and exchange rate policy traded off more condos for fewer factories.”

Avery Shenfeld, chief economist at CIBC World Markets and author of the report, told Canada Real Time Mr. Carney deserves all the credit he got for his quick actions during the slump. But he is bothered by decisions taken by the Bank of Canada from 2010 to 2013, when rate hikes and signals of potential further increases, and a hands-off approach to a strong domestic currency, left the Canadian dollar trading higher than the U.S. dollar for a while. Mr. Shenfeld said the currency’s gains were driven by short-term capital inflows into Canadian assets.

Other countries that faced similar problems intervened to neutralize the inflows of such “hot money.” For example, Switzerland’s central bank set a 1.20 franc per euro ceiling in 2011 to curb its surging currency, but Mr. Shenfeld said the Bank of Canada opted to soften the impact by keeping interest rates low enough to stimulate housing and domestic consumption.

“But that came at a cost, when businesses were making long term decisions” about where to locate plants, he argued. “Canada may have suffered more permanent closures than it would have, had we kept the Canadian dollar where it is today.”

The Canadian dollar is currently trading around 90 U.S. cents, down 7.4% since last October when Stephen Poloz, Mr. Carney’s successor, dropped signals of rate hikes amid concerns about low inflation, and sounded increasingly dovish at the following two policy decisions.

But it may be too late for factories that have already closed. According to Mr. Shenfeld, if Mr. Carney had taken a page from his Swiss counterparts and intervened to cap the Canadian dollar’s strength, there may not have been as many factory closures in Canada. Those plants might now have been gearing up to benefit from the global recovery and a lower currency, meaning exports and investment would be driving growth—something the central bank has sought.

Spokesmen for both the Bank of Canada and Mr. Carney at the Bank of England declined to comment.

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